1. Field of Invention
The present invention relates to methods for determining the value of an intellectual property asset, and more particularly to valuation methods which rely upon the competitive advantage offered by the asset as their foundation.
2. Description of Prior Art
Intellectual property assets have become an increasingly important source of corporate wealth. Estimates of the fraction of total market capitalization in the U.S. comprising intellectual property assets range from fifty percent to over ninety percent, representing trillions of dollars of corporate assets. Valuation is a core task in the management of all assets. Management competency, however, has lagged behind the growing importance of intellectual property assets. Estimates of the underutilization of intellectual property assets in the U.S. range from $100 billion to nearly $1 trillion. There are many reasons for the gap between management competency and the growing importance of intellectual property assets to corporate value. One of the most important of these reasons is the lack of adequate methods for the valuation of intellectual property assets.
Marketing, finance, sales and many other management functions depend upon a knowledge of an asset's value. There are a number of well developed and widely accepted methods available for valuing tangible assets. There is no such method available for valuing intellectual property assets. The lack of adequate valuation methods for intellectual property assets impedes their development, use and exchange.
The proper valuation of intellectual property assets is a multi-billion dollar challenge in today's economy. Intellectual property assets should be managed to maximize shareholder value in the same way as tangible assets such as land, buildings, and equipment. Intellectual property assets also need to be valued in the same way as land, buildings, and equipment in order to be properly managed. Unfortunately, the valuation methods which have been developed for tangible property cannot be used with intellectual property because of the lack of established markets for intellectual property assets.
The “market method” is the most reliable measure of tangible property value when it can be used. The market method determines the value of a given tangible asset by the price paid for comparable assets. Use of the market method is dependent on four critical conditions: there must be an active market for substantially similar assets; the transactions must be substantially similar; the parties must deal at arm's length with one another; and the prices and terms of the transactions must be available to the public in some form. Unfortunately, the conditions required by the market method do not exist in the context of intellectual property. Intellectual property assets are required by law to be dissimilar; patents must be novel and non-obvious compared to prior art and copyrights must be original works. Although exchanges of patents, copyrights and trade secrets occur every day in every industry, these exchanges do not take place through established markets, but are sporadic and specialized. Intellectual property exchanges are generally motivated by strategic advantage, not by trading opportunities, and are unique to the firms involved. There is a wide variety of terms and conditions by which intellectual property can be transferred. Licensing professionals craft agreements to suit the special needs of their clients and rarely are two agreements identical. The greatest disadvantage in using the market method to value intellectual property, however, is the lack of publicly available information on the terms and conditions of exchanges.
A number of different methods have been proposed specifically for the valuation of intellectual property assets. Nevertheless, each of these methods has disadvantages. One “rule of thumb” method is commonly known as the “25% rule.” The 25% rule sets the licensor's royalties at 25% of the licensee's net profits derived from the license. The disadvantage of the 25% rule is that one rule cannot value all intellectual property, for all parties, in all situations. An even more simple rule of thumb is the “$50,000 rule.” The $50,000 rule states that the average patent in the average patent portfolio has a value of $50,000. The disadvantage of the $50,000 rule is that one value cannot be attributed to all patents, in all portfolios, at all times.
Another method proposed for valuation of intellectual property assets is the “top-down” method. The top-down method begins by calculating the market value of a firm, either from the price of its outstanding common stock, in the case of a public company, or from substitute measures such as price-earnings ratios or net cash flows, in the case of a private company. The total value of the firm's tangible assets, including land, buildings, equipment and working capital, is then subtracted from the market value of the firm and the remainder is the total value of the firm's intangible assets. The primary disadvantages of the top-down method are that is does not distinguish between intangible asserts, such as goodwill, and intellectual property assets, such as patents, and cannot be used to value individual or distinct groups of intellectual property assets. The top-down method also does not provide a means for differentiating among different types of intangible assets, or apportioning market value among distinct sets of intellectual property assets.
A variation of the top-down method is the known as the “tech factor method.” The tech factor method associates core patents with different business divisions of the firm, and then allocates the business divisions' total net present value among the core patents based on an industry specific standard percentage. One disadvantage of the tech factor method is that it does not account for the effect of intellectual property assets other than patents on a business division's total net present value. Another disadvantage is that the method cannot value individual patents, or groups of patents, differently. All patents associated with the same business division will have the same value.
Another approach to valuing intellectual property assets is the “knowledge capital scorecard.” The knowledge capital scorecard first subtracts from a firm's annual normalized earnings the earnings from tangible and financial assets. The remainder of the earnings, which are generated by “knowledge assets,” is divided by a knowledge capital discount rate to calculate the value of intellectual property assets. One disadvantage of the knowledge capital scorecard is that it does not separate the different types of “knowledge assets,” such as management skill and patented processes. Another disadvantage is that the method cannot value individual knowledge assets, or groups of knowledge assets, differently.
The most recent methods which have been proposed for valuation of intellectual property assets use mathematical or economic models. The “Monte Carlo analysis” attempts to value intellectual property assets based on a probability weighted distribution of alternative possible values. “Black-Scholes option analysis” attempts to value intellectual property assets based on the value of future strategic options which a firm possesses as a result of owning the intellectual property asset. The disadvantages of these methods are that they are very complex, require substantial technical and computing resources, and depend on large amounts of detailed data and use coarse measurements within sophisticated formulas.
Finally, the Technology Risk Reward Unit (TRRU) valuation method is a modification of Black-Scholes option pricing model. The TRRU method combines data on the cost of completing technology development, the time required to bring the technology to market, the date of patent expiration, the marketplace value of the technology, the variability of the value estimate, and a risk-free interest rate to determine a suggested value for an intellectual property asset. The TRRU method uses a proxy value to calculate the mean intellectual property asset value with an industry sector. The proxy value is calculated by dividing the market capitalization value of each company included in the industry sector by the number of products the company offers in the market and averaging the quotients from all of the companies in the industry sector. The TRRU method also uses an Intangible Asset Market Index (IAM) to adjust the marketplace value of an intellectual property asset. The IAM tracks broad industry segments, such as health care and automobiles, and industry subgroups within each segment, such as imaging equipment and automotive glass, to measure macroeconomic changes in a market which could affect the value of an intellectual property asset. The disadvantage of the TRRU method is that it does not account for different types of intellectual property assets and does not differentiate between intellectual property assets representing minor and major advances in a field.
3. Objects and Advantages
It is therefore a principal object and advantage of the present invention to provide a methodology that can be used to distinguish among different types of intellectual property assets, to value individual or sets of related intellectual property assets, and to value intellectual property assets consisting of minor and major advances in a field differently.
A further object and advantage of the present invention is to provide a methodology that can be implemented with a minimum amount of information generally available to the public and that can also be implemented with information generated through proprietary research and analysis thus allowing the user to decide the trade-off between cost and relative accuracy of the valuation on a case-by-case basis.
An additional object and advantage of the present invention is to provide a methodology that can be used for valuing early-stage technologies, planning development of pre-market products, negotiating licensing transactions, and selecting among research and development investments.
With regard to valuing early-stage technologies, the present invention has the object and advantage of being able to calculate the competitive advantage of an early-stage technology and to predict its market share and present value.
With regard to planning the development of pre-market products, the invention has the object and advantage of being able to value different product configurations to determine which provides the greatest return on total investment.
With regard negotiating licensing transactions, the invention has the object and advantage of being able to calculate the value of a license to a licensor and a licensee, of calculating a license payment which provides a licensor and a licensee an equal percentage rate of return on their respective investments in the license, of adjusting a license payment for the relative risk assumed by a licensor and a licensee, of adjusting a license payment for licenses to a competitor and a non-competitor, and of adjusting a license payment for an exclusive, limited exclusive, or non-exclusive license.
With regard to selecting among research and development investments, the invention has the object and advantage of calculating the return on investment in the creation of new intellectual property assets incorporated in existing or new products.
Other objects and advantages of the present invention will in part be obvious, and in part appear hereinafter.